Sign up for our daily briefing

Make your busy days simpler with Axios AM/PM. Catch up on what's new and why it matters in just 5 minutes.

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Stay on top of the latest market trends

Subscribe to Axios Markets for the latest market trends and economic insights. Sign up for free.

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Sports news worthy of your time

Binge on the stats and stories that drive the sports world with Axios Sports. Sign up for free.

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Tech news worthy of your time

Get our smart take on technology from the Valley and D.C. with Axios Login. Sign up for free.

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Get the inside stories

Get an insider's guide to the new White House with Axios Sneak Peek. Sign up for free.

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Catch up on coronavirus stories and special reports, curated by Mike Allen everyday

Catch up on coronavirus stories and special reports, curated by Mike Allen everyday

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Want a daily digest of the top Denver news?

Get a daily digest of the most important stories affecting your hometown with Axios Denver

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Want a daily digest of the top Des Moines news?

Get a daily digest of the most important stories affecting your hometown with Axios Des Moines

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Want a daily digest of the top Twin Cities news?

Get a daily digest of the most important stories affecting your hometown with Axios Twin Cities

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Want a daily digest of the top Tampa Bay news?

Get a daily digest of the most important stories affecting your hometown with Axios Tampa Bay

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Want a daily digest of the top Charlotte news?

Get a daily digest of the most important stories affecting your hometown with Axios Charlotte

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Please enter a valid email.

Please enter a valid email.

Subscription failed
Thank you for subscribing!

Illustration: Aïda Amer/Axios

National security concerns drove a recent bipartisan Senate vote to crack down on Chinese companies that can hide their books from U.S. regulators even though they are publicly traded on U.S. exchanges, according to interviews with six current and former US. officials.

The big picture: The Holding Foreign Companies Accountable Act, which the Senate passed May 20, targets fraud and aims to promote transparency. But U.S. officials are also hoping to uncover hidden links between these companies and the Chinese government.

  • Supporters have characterized the bill as a way to protect American investors from fraudulent Chinese business activity, such as the recent scandal over Luckin, a Chinese coffee startup and former “unicorn” that received delisting notices from the Nasdaq after fabricating hundreds of millions of dollars in sales.
  • But the legislation is also about putting these companies “on the horns of a dilemma,” says a former national security official: They can stop cooperating with Chinese security services or lose access to Western capital.
  • More than 150 mainland Chinese companies are traded on major U.S. exchanges.

Why it matters: The tough stance on Chinese companies publicly traded on U.S. exchanges, which includes tech giants such as Baidu and Alibaba, opens up a new front in the increasingly tense U.S.-China relationship.

Between the lines: By listing themselves on U.S. exchanges, Chinese companies are gaining access to Western capital markets and becoming intermingled in pension funds and other investment vehicles for U.S. workers.

  • But U.S. officials believe that stringent auditing of some of these companies may reveal far closer government links than is publicly known. The closer the links, the likelier these companies are working with China’s security services.
  • Such links could potentially involve the transfer of private company data to China’s intelligence services or the use of these companies’ infrastructure as surveillance or intelligence collection platforms, more than half a dozen current and former U.S. officials told Axios.

Driving the news: The bipartisan-sponsored Holding Foreign Companies Accountable Act requires “issuers of securities to establish that they are not owned or controlled by a foreign government.”

  • The bill is aimed at Chinese companies that are publicly traded on U.S. exchanges, requiring them to provide details on potential state ownership or control, and board members’ relationship to the Chinese Communist Party.
  • Noncompliant companies would risk being delisted on U.S. exchanges, according to the bill.

Though the public rationale for the bill is to protect American holders of securities from these companies from financial fraud, larger national security worries are also driving the legislation, say current and former U.S. officials.

  • National Security Council staff flagged this issue to congressional offices in 2018, according to people familiar with the matter.
  • Some supporters of the Senate bill believe that this measure could strike at the heart of China’s power by reducing its access to Western capital.

Background: In May 2013, the Public Company Accounting Oversight Board (PCAOB) signed a memorandum of understanding with the China Securities Regulatory Commission and the Ministry of Finance.

  • The PCAOB, a nonprofit corporation created by Congress and overseen by the Securities and Exchange Commission, provides third-party oversight of private audits of companies on U.S. exchanges.
  • The 2013 agreement was intended to help facilitate these third-party audit requests, and it was viewed as a step toward cross-border enforcement of capital markets.

But Chinese companies have violated the agreement, according to the PCAOB as well as current and former U.S. officials.

Some U.S. officials believe the agreement was flawed from the start. It allowed “Chinese entities that are listed on the New York Stock Exchange essentially to violate U.S. law by not providing audit work documents or any sort of the transparency you would have in other publicly traded companies,” says a former senior national security official.

What they're saying: “As we have said on our earnings call on May 22, we have always received an unqualified opinion from our auditors on our financial reports showing the auditors believe they have unfettered access to our financials," a statement from Alibaba read.

  • "Also, there is an existing framework for the PCAOB to conduct an inspection of audits on companies with Chinese operations. We understand that there has been ongoing dialogue for the Chinese authorities to permit access by the PCAOB to audit work papers while maintaining compliance with local law.”

The intrigue: The reason Chinese companies are unable to facilitate third-party audits is that Chinese state secrets law appears to prohibit it.

  • “PRC state secret law is so broad that anything can be interpreted as a state secret,” says Kyle Sullivan, the China practice lead at Crumpton Group. “There’s no doubt that some big national champions, regardless of ownership structure, are very close to the party. That’s why they refuse to cooperate with the U.S. in terms of independent auditing.”
  • “The Chinese government has been able to consider all of Alibaba’s internal work documents to be state secrets, despite the fact that they are a publicly traded company,” says the former senior national security official.

The bottom line: Whether or not the Senate bill becomes law, it’s clear that China’s overly broad state secrets law and its proclivity for bulk data collection is a salient concern for many U.S. officials.

Go deeper: The U.S. rift with China has tech on edge

Editor's note: This story has been updated with comment from Alibaba.

Go deeper

Sep 30, 2020 - World

House report: U.S. intelligence agencies have failed to adapt to China threat

Xi Jinping and other Chinese politicians and delegates listen to the national anthem duirng the closing of the 19th Communist Party Congress in 2017. Photo: Lintao Zhang/Getty Images

The House Intelligence Committee on Wednesday released a report finding that the U.S. intelligence community has failed to adapt to the growing threat from China, arguing that it will struggle to compete on the global stage for decades to come if it does not implement major changes.

The big picture: The 200-page report, based on thousands of analytic assessments and hundreds of hours of interviews with intelligence officers, determined that the intelligence community's focus on counterterrorism after 9/11 allowed China "to transform itself into a nation potentially capable of supplanting the United States as the leading power in the world."

DOJ pressed to enforce Al Jazeera foreign agent ruling

Illustration: Aïda Amer/Axios

The Justice Department is being pressed to enforce its own demand that the U.S. arm of Qatari broadcaster Al Jazeera register as a foreign agent.

Why it matters: The launch of Al Jazeera's new right-of-center U.S. media venture, Rightly, has refocused attention on the media company's alleged links to Doha, and DOJ's efforts to crack down on media outlets viewed as foreign interest mouthpieces.

Poll: Immigration is America's most-polarizing issue

Data: The American Aspirations Index/Populace; Chart: Will Chase/Axios

Immigration was found to be the most polarizing issue in America based on new polling from Populace.

Why it matters: Americans have surprisingly similar priorities for the U.S., but immigration stands out as one of the few issues with clear partisan differences. It underscores the challenge for advocates and lawmakers hoping to pass immigration reform in the coming weeks amid narrow margins in Congress.